SEC Mulling Increased Fund Disclosure

Despite opposition from the fund industry, the Securities and Exchange Commission is considering regulations that would require mutual funds to disclose their holdings more frequently, the nations top mutual fund regulator has told a meeting of fund executives.

At the annual meeting last week of the Investment Company Institute in Washington, Paul Roye, director of the SECs division of investment management, said the commission is examining outside petitions on the subject.

Fourteen organizations  including the AFL-CIO, the International Brotherhood of Teamsters, and the Consumer Federation of America  have asked the SEC in the past year to force funds to disclose their holdings more frequently. Most of the petitions requested monthly disclosures.

Most funds currently reveal their holdings twice a year, as the SEC requires.

Increasing the frequency of disclosures would be in the best interest of shareholders, the groups say.

As I am sure many of you know, we have received several rulemaking petitions asking us to review the frequency with which portfolio holdings are disclosed, Mr. Roye said in a speech Friday at the ICI meeting. Our consideration of this issue requires us to balance the needs and desires of various types of investors against imposing undue burdens or causing adverse impacts on funds, such as facilitating front-running of the fund or compromising their investment strategies.

Front-running is day traders practice of buying up a stock in anticipation of a major purchase by a mutual fund, which ultimately drives up the price for the funds investors.

Mr. Royes comments were in response to a speech the previous day by ICI president Matthew P. Fink, who said that fund shareholders would be hurt by increased disclosure.

In his presentation Mr. Fink said that the main beneficiaries of such a requirement would be day traders, who would have more opportunities to front-run, and that shareholders would not benefit at all.

It is clear that mandating more portfolio disclosure would make money for traders  money that would come out of the pockets of fund shareholders, he said.

Keith Hartstein, executive vice president of sales and marketing at John Hancock Funds Inc., agreed that releasing such information more frequently would hurt shareholders.

Call me cynical, but I think more frequent disclosure would only end up being used improperly, he said. I see no benefit in aiding or abetting that kind of movement.

Investors can find out general information about a funds investments by checking with organizations like Morningstar Inc.  which tracks the holdings of most mutual funds and discloses limited data on them to the public.

Still, a small but vocal chorus of critics claims that disclosing a funds holdings only twice a year works against the interests of its shareholders.

Mercer Bullard, a former assistant chief counsel at the SEC who has lobbied heavily on this issue, said numerous studies have shown that many funds buy or sell securities at the end of the year in order to spruce up their reported performance  a practice known as window dressing.

More frequent disclosures would largely eliminate that practice by forcing portfolio managers to become more disciplined, he said.

Critics also say that investors need more frequent and more timely information to ensure that portfolio managers are sticking to their stated investment style. Managers often stray from their funds style  for example, by buying tech stocks for what is ostensibly a value fund, Mr. Bullard said  and opening the holdings to more frequent scrutiny would help keep them consistent.

Funds could safely disclose their holdings more regularly if they released the information two to three months late, Mr. Bullard said. This would let shareholders determine whether their funds are sticking to their stated investment style without giving traders any usable information, he said.

Harold Evensky, president of the financial advisory firm Evensky PFO, said mutual funds simply have a fiduciary responsibility to reveal their investment decisions to their shareholders. Its not their money; its their clients money, he said.

Mr. Evensky also said that the ICIs position is unfair to retail investors since the funds readily provide information on their holdings to institutional investors. The groups position may ultimately force financial advisers to take their clients money out of mutual funds in favor of other investment vehicles, such as separate accounts, he said.

Though proponents of more frequent disclosure have enlisted allies such as the unions, they say the lack of public attention to the issue and the industrys strong opposition could impede reform.

The ICI is hysterical enough on this issue that it will likely have an effect on the SEC, Mr. Bullard said.

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